The Amazon-Berkshire-JPM Health Care Playbook
What do you get when you combine Atul Gawande’s expertise with three firms that hold a combined market capitalization of $1.6 trillion?
Amazon, Berkshire Hathaway, and JP Morgan Chase (ABC) announced last Wednesday that Dr. Atul Gawande will serve as CEO for their unnamed health care venture first publicized in January.
“I’m thrilled to be named CEO of this healthcare initiative, I have devoted my public health career to building scalable solutions for better healthcare delivery that are saving lives, reducing suffering, and eliminating wasteful spending both in the US and across the world. Now I have the backing of these remarkable organizations to pursue this mission with even greater impact for more than a million people, and in doing so incubate better models of care for all. This work will take time but must be done. The system is broken, and better is possible.”
— Atul Gawande
This choice was met with split reactions, but the larger question is how Atul will deploy the resources of these three giants of industry to affect a much smaller, yet more distributed, network of employees than most health systems and insurers.
In this essay, I dive into the trends that compelled ABC to take on the health care industry, how each company’s strengths contribute to tackling some of health care’s biggest challenges, and how Gawande, who’s made a career of moving ideas from the written page into the clinic, could combine the best of health services research, technology, and strategy to deliver a transformative health care experience.
Table of Contents:
- The Challenge
- The Goals
- The Play
The Challenge
Over the last decade, the total cost of annual health insurance coverage has increased by over 50%, squeezing both employer margins and hampering wage growth.
One of the most troubling trends in particular is the shift of insurance coverage from more comprehensive benefits packages to high-deductible health plans (HDHPs), which offer cheaper premiums, but require enrollees to pay a large out-of-pocket cost (ranging anywhere from $1350-$6650 for an individual) before they receive any help from their insurer. Given that 40% of Americans don’t have enough cash in the bank to cover even a $400 emergency expense, requiring them to pay multiples of that for health care renders their coverage all but useless.
Now, put this into the context of the largest employee pools and their characteristics for each of these three companies:
Amazon | warehouse fulfillment workers: usually short-term (1-year) jobs, resulting in unstable health insurance coverage, in a physically demanding role with high occupational hazard.
Berkshire Hathaway | manufacturing/construction workers: unionized blue collar jobs, distributed across midwest and southern states with fewer health care resources and high occupational hazard.
JP Morgan Chase| bank tellers: middle class, distributed nationally, largely suburban.
None of these groups are well served in the current U.S. health care system. Most earn enough to be disqualified for Medicaid, but don’t make enough for a private sector plan with a $2000 deductible to provide any useful coverage without bankrupting families’ savings.
Hence, the initiative by ABC to take on rising health care costs for employers and poor coverage for their employees.
The Goals
Because the new organization’s structure and solution(s) are yet to be decided or announced, it makes sense to examine the stated goals of the venture from the words of Bezos, Dimon, and Buffett.
The new company will be independent and free from profit-making incentives and constraints. The new venture’s initial focus would be on technology that provides simplified, high-quality and transparent care.
All three executives made it clear that the effort would first and foremost be focused on their approximately 1.2 million employees, bolstered by their data and bargaining power to lower health care costs. If successful, the solutions that the venture develops may be gradually rolled out to all Americans.
At the Aspen Ideas Festival, Gawande outlined his objective as CEO to eliminate health care waste along three axes:
- High administrative costs — taking middlemen out of the system.
- Pricing failures — unit prices per product or service are too high.
- Misutilization — wrong care pushing out the right care.
It’s important to note that these are not independent challenges, but inextricably linked. Pricing failures are partly said to arise from high administrative costs and middlemen. As I wrote in STAT:
“The cost of labor makes up more than half of the total cost of delivering health care. So as health care employment rises, it pulls up health care prices. Expenses are passed down to employers and patients in health insurance premiums, which are escalating at a rate outpacing inflation.
More jobs and higher prices haven’t translated to better health care. The rapid growth in employment has largely come from adding administrative and management jobs, rather than from adding clinicians responsible for direct patient care. Administrative costs in U.S. health care are the highest in the developed world, accounting for more than 25 percent of spending in the sector.”
However, supplemental labor is often what helps reduce misutilization of health care services. Health coaches help change patient behavior for chronic disease management, back office staff handle claims and scheduling so clinicians can focus on patient care, and medical scribes give physicians more quality time with patients rather than their keyboards.
Misutilization is often exacerbated by consumer price sensitivity as a result of HDHPs. Out-of-pocket spending on health care isn’t a problem in countries like Singapore where the government has price controls on medical services, but research shows that, due to high U.S. prices, HDHPs are coarse and ineffective, and don’t make consumers better shoppers for high-value care. They simply tamp down utilization of all health care services.
Before going through mechanisms to tackle each of these challenges, let’s examine the strengths of each firm involved in the venture, and what they, at a high level, could contribute to each axis.
Amazon
The world’s most consumer-centric company has strong bargaining power with suppliers due to market reach of its e-commerce business, scale moat in its unit economics and logistics, affluent neighborhood presence via Whole Foods, internal incubation of advanced logistics startups like Prime Now and Air, and most notably, success in public markets despite — until recently — negative to light profits.
Berkshire Hathaway
Given that Berkshire has fewer than 30 employees but oversees a basket of businesses with a collective 360,000 employees, Buffett has an eye for and emphasis on strong management teams when making acquisitions. The firm’s collection of companies also lends itself to strategic capital allocation — redeploying profits from a cash heavy subsidiary into others that are capital intensive (like a health insurance risk pool). Finally, some management aspects of Berkshire’s GEICO insurance unit, notable for its low operating costs and high market share relative to competitors, might be translatable to a health insurance play.
JP Morgan Chase
The world’s leading investment bank by revenue offers sheer size, diversity of assets, and access to capital markets.
Note: It’s worth mentioning the goals Jamie Dimon outlined in his annual letter to JPM shareholders. Some of what he hopes for has been previously attempted in employer-sponsored insurance plans to date, but with little success. Among his goals (italics mine):
- Aligning incentives among doctors, insurers, and patients (e.g. outcomes-based contracts).
- Reducing fraud and waste (e.g.workflow automation, transparent pricing).
- Giving employees more access to telemedicine and better wellness programs (e.g.Omada Health, Lemonaid Health).
- Figuring out why so much money is spent on end-of-life care (Also why Humana, a large Medicare Advantage insurer, is on a hospice acquisition spree).
The Play
“But what they’re saying to me is that resources won’t be the problem. Human behavior will be. And achieving scale will be.”
— Atul Gawande
The ABC Play: A virtual primary care model, with direct contracting for downstream utilization of health care services, paid for under a value-based insurance design system.
Gawande’s advocacy for the merits of incremental care lends itself to building a model of primary care that reduces long-term costs while also harnessing the competitive advantages of Amazon, Berkshire, and JPM to deliver a distributed, scalable service.
Kevin O’Leary broke down the three methods in which incremental care can reduce overall health care spending (his table below). Each arm of this potential structure for the ABC health care venture operates on one or more of the three methods, or buckets.
Virtual Primary Care:
Harvard economist Amitabh Chandra outlined the employee distribution and diversity challenge of providing health care to 1.2M ABC employees best:
New primary care models like Iora Health and One Medical run brick-and-mortar clinics across the country, each able to spread due to their focus on serving niche demographics (e.g. MA and high-income respectively) rather than commercial populations that directly compete with one another. However, with just one million widely distributed employees, adopting a copycat model of existing primary care startups won’t be effective at managing diverse population needs or reaching the per-patient membership benchmark per-clinic to remain financially sustainable.
Instead, harnessing Amazon’s software engineering and product resources to adopt the Virtual Primary Care model (below flowchart), pioneered by Sherpaa Health, increases panel size per physician (e.g. 2500–3000 patients) and reduces fixed costs associated with physical infrastructure, which makes the unit economics of primary care more appealing. Reduced operating expenses allows this model to offer consumers a lower per-patient-per-month price point (Goal #2). For a more thorough explanation of the unit economics of primary care models, read Part 1 of Kevin’s series.
This approach uses Bucket Three — decreasing overall demand for downstream health care services by keeping people healthier. Ideally a network of health coaches to encourage personalized health and well-being, asynchronous messaging for seamless communication and guidance with care team members, and a streamlined workflow process for care teams will see improved patient health outcomes and reduced clinical burnout. By no mistake, Gawande’s research has been studying workflow implementation and changing the behavior of health systems for nearly a decade, and his team will likely have the methods to put a system like this into place nationally.
This particular bucket could take years, if not decades, to prove to be cost-effective at scale, but because this venture is a non-profit funded by three companies with some of the largest cash reserves on the planet, they can afford to be patient.
Value-based Insurance Design:
Unlike HDHPs, the value-based insurance design (VBID) approach sets copayment rates on the value of clinical services — the benefits and costs — rather than the costs alone. This tunable approach to benefits design nudges consumers towards high-value care and away from low-value, expensive care (Goal #3). This approach uses Bucket Two — reducing misutilization of health care services.
In this instance, VBID plans could be modified to target individuals with specific diagnoses (e.g. reduced copayments for beta-blockers for CHF patients) or those living in particular geographic regions. In theory, this could also function to reduce long-term costs (Bucket Three) by incentivizing people to use the care most likely to improve their long-term health.
These systems will be more costly to implement due to the need for cooperation and transfer of eligibility data between payers and the point of care. This is why existing VBID initiatives have been limited to conditions like diabetes, where it’s easier to ascertain condition status simply from medications taken. Obtaining integrated claims data would be ideal here and help create in-house VBID plans across different disease areas.
Given those needs, Oscar Health’s 1) customer-facing concierge support and analytics that utilizes digital interventions to nudge users towards higher value care along with 2) an in-house claims processing unit powered by software (Goal #1) offers the perfect partnership (or very expensive acquisition) opportunity here.
By refining the team’s operational approach, using data to learn and evolve, automating claims holds and routing, developing sophisticated matching algorithms for doctor and member information, and flagging risky charges early, his team has been able to reduce accuracy issues, pay claims faster (on average, within 5 days of receipt), and increase the number of claims that move through the system without needing a person to look at them.
Direct Contracting
Walmart has bypassed insurers (Goal #1) and is instead buying health care for its 1.4M U.S. employees directly from health care organizations, using its status as the largest private employer in the U.S. as bargaining leverage to negotiate lower rates (Goal #2).
Along with Boeing, GE, and others, Walmart has negotiated bundled payment contracts with health systems via the Employers Centers of Excellence Network (ECEN), a collection of employers directly purchasing health care for their employees. This approach uses Bucket One — influencing utilization of downstream health care services. As the Harvard Business Review writes:
ECEN began first with total joint replacement, then added spinal surgery, and recently has begun providing bariatric (weight loss) surgery at selected centers. ECEN provides employees of participating companies with 100% coverage for all travel and medical expenses at carefully selected healthcare systems; patients pay no out-of-pocket costs. Participating employers benefit from the quality assurance of the ECEN’s rigorous center selection process and the financial savings from paying competitive, pre-set rates for bundled care negotiated between participating hospitals [and ECEN].
ABC has a collective 1.2M employees and could follow the same methodology outlined by ECEN (below, bolding mine) to identify and contract with health systems that provide high-quality specialty care under bundled payments. Charges per episode-of-care average 10–15% less than traditional fee-for-service medicine and the selection process offers the same transparency that ABC has been chomping at the bit to achieve.
Hospitals and individual participating physicians undergo a thorough and iterative evaluation process. Fewer than 5% of healthcare systems initially identified for participation in ECEN meet all of the quality requirements for consideration. An invitation-only request for information from ECEN leads to an extensive review of the system’s quality, outcomes, and patient satisfaction data.
After an assessment phone call that includes PBGH, HDP, as well as physicians and administrators from the health system under consideration, an extensive request for proposal is sent for completion. Candidate centers must provide information including detailed clinical protocols, surgical-patient selection criteria, clinical registry participation, information on multidisciplinary shared decision-making, as well as institutional and physician-level performance metrics. These metrics include length of stay, return to surgery, infection rates, and procedure-specific outcomes such as joint dislocation after hip replacement and nerve covering tears occurring during spinal surgery.
For centers remaining in consideration after these initial steps, PBGH and HDP perform an in-depth site visit utilizing a patient tracer methodology. The patient experience is reviewed from arrival at the airport, throughout the care cycle, and to departing for home. A successful visit moves the process along to negotiation and contracting.
Conclusion
On aggregate, I have a feeling that, operationally, this venture will be an extension of the process that Gawande has already cultivated at his health systems innovation group Ariadne Labs (Atul is also a proponent of #TrustTheProcess).
As a final note, two things not covered in the above essay, but important to mention:
- Drug pricing — An ongoing lawsuit between Express Scripts and CareZone could pave the way for Amazon to enter the prescription pharmacy business (and why they should buy PillPack if Walmart doesn’t).
- Nutrition — there’s growing evidence that condition-specific meal plans can be as effective, if not moreso, than a specialty drug and reduce long-term health care spending. Amazon’s logistics backbone could deliver medically-necessary meals to employees akin to their AmazonFresh program as a component of a VBID plan specific to conditions such as diabetes or congestive heart failure.
Thanks to Franklin Yang and Abhishek Dharan for reading drafts of this.
If you found any of this helpful or interesting (or disagree completely), please share and/or reach out to me on twitter @nxpatel. I’d love to hear your thoughts.
